New Medicaid Welfare Trap

Boosters of Obamacare are pressuring officials in Harrisburg to expand Medicaid to an estimated 521,000 Pennsylvanians who don't qualify for the program.

Arguments against expansion are well known. It would put additional stress on a program that already has too many enrollees and too few doctors. It would lead to a huge boost in costs for what is already the single most expensive program in the state budget. Most ironically, it would channel uninsured people into a program proven to produce health outcomes no better - and sometimes worse - than those experienced by uninsured people.

But there is another side effect: It could trap more young adults in low-wage and part-time jobs. The program creates perverse incentives that make it advantageous to have employees go into Medicaid - and stay there.

From a low-income worker's perspective, Medicaid will be the least costly of three possible coverage options under Obamacare. If he enrolls in Medicaid, the worker pays no premium whatsoever.

A low-income worker who earns too much to qualify for Medicaid, and whose employer doesn't offer coverage, will qualify for subsidized coverage purchased through an Obamacare insurance exchange. But he will pay 2 percent of his income toward premiums.

The third option arises for low-income workers whose employers do offer coverage. Employers can charge them up to 9.5 percent of their pay toward premium costs, and Obamacare will still consider the coverage "affordable," denying them access to subsidized exchange coverage.

Clearly, the cheapest option is Medicaid - for those "lucky" enough to qualify.

The financial incentives for employers to keep low-wage workers on Medicaid are even stronger. One of the arguments being used to pressure state lawmakers into expanding Medicaid is that it will help businesses avoid the cost of insuring their low-wage workers; by dumping them into Medicaid, they can also avoid Obamacare fines for not providing insurance.

Certainly employers have no desire to drive up their operating costs by providing (expensive) coverage for their least-productive workers or paying a fine of $2,000 per worker. The fine alone would add $1 per hour in labor costs for each uncovered full-time worker - 13.8 percent increase for a minimum-wage job. Even for jobs paying $12 an hour, the fine still imposes a significant (8.3 percent) increase in labor costs.

The upshot is that Obamacare gives employers a tremendous incentive to keep their lower-wage workers eligible for Medicaid by limiting their wage rates and hours. At the same time, it makes those restrictions on pay more acceptable for low-wage workers, because it allows them to keep their "free" health coverage. Medicaid essentially functions as a large income subsidy. The more individuals receive in noncash government benefits like Medicaid, the less need they have for cash income. That means you can add Medicaid expansion to the list of government initiatives that actively discourage economic upward mobility.

So, guess who's going to be put into Medicaid if states adopt the expansion?

It won't be poor children - they're covered by Medicaid. Poor pregnant women and almost all disabled adults are, too. Nor will it be the elderly poor - they have Medicare. Furthermore, many low-income parents of children on Medicaid are themselves covered by Medicaid.

All the new Medicaid enrollees will be adults, and almost all will be able-bodied. Only one of every seven will have dependent children. And more than half will be between the ages of 19 and 34.

Thus, the expansion will function as a large welfare benefit for able-bodied, childless, young adults. They will be able to get and keep that free health care as long as they don't earn too much - a situation that employers will gladly help them arrange.

Of course, a higher income is always better than a lower one. Yet, if you're a single, childless twenty-something with a low-wage job, you don't have to spend anything you earn on anybody but yourself. If keeping your free Medicaid coverage means working a few fewer hours - and having a bit more time off - that's not the worst thing in the world.

Not only will these perverse incentives produce higher-than-projected Medicaid enrollment over time, they will also increase the number of underemployed young adults. Indeed, higher rates of unemployment and underemployment among young adults are permanent economic features of countries that provide able-bodied adults with taxpayer-financed social-welfare benefits.

Today, half of all Medicaid beneficiaries are poor children. But for states that adopt the Obamacare expansion, the new face of Medicaid will be a 28-year-old graduate student hanging out in a coffee house, writing his dissertation, and working the other side of the counter a few days a week.

What if you own that coffee shop? Well, you get part-time, low-wage workers with no need for a costly employee health plan and no Obamacare fines. What's not to like?

-Ed Haislmaier is a senior research fellow at the Heritage Foundation's Center for Health Policy Studies.

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